Crowdfunding rules offered by SEC for public comment

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Valley View Farm in Topsfield this year used Kickstarter to expand its cheese business.

By Dave MichaelsBloomberg News
October 24, 2013

WASHINGTON — Start-ups and small businesses could soon sell ownership stakes in their companies by soliciting investors over the Internet under a proposal advanced by the Securities and Exchange Commission to implement a 2012 crowdfunding law.

The plan would set rules for equity crowdfunding, which lawmakers said would spur economic growth by easing financing for start-ups and small companies when they mandated it in the Jumpstart Our Business Startups Act.

The SEC voted 5 to 0 Wednesday to seek public comment on the proposed rules.

Businesses too small or risky to attract funding from banks or venture capitalists are expected to use equity crowdfunding. Regulators say they tried to address concerns that such fund-raising will invite fraud.

‘‘The proposal before us today appears to offer great promise for providing capital to small businesses so they can survive and hopefully thrive, but it may also provide great risks to investors,’’ Democratic SEC Commissioner Kara M. Stein said. ‘‘If we don’t get it right, I fear that the promise of crowdfunding will be lost.’’

In July, the SEC approved a rule lifting the ban on advertising for investors outside of a public offering, which eased the ability to market directly to accredited investors, or those considered sophisticated and wealthy enough to understand the risks of investing and withstand a loss.

Crowdfunding has drawn wide interest because it will be open to any investor, regardless of the person’s income or net worth. Under the proposal, crowdfunding must be done online through an entity that provides investors with forums to ask questions about a deal.

‘‘All investors, not just the so-called accredited investors, will have the opportunity to invest in entrepreneurs and their ideas at an earlier stage than ever before,’’ Republican SEC Commissioner Michael Piwowar said.

Businesses using crowdfunding could raise no more than $5,000 a year from someone whose income or net worth is less than $100,000. Investors with income or net worth greater than $100,000 could contribute as much as 10 percent of annual income or net worth, to a maximum of $100,000 in one year.

The proposal does not require businesses or funding portals engaged in crowdfunding to verify compliance with the restrictions. Instead, a crowdfunding portal must ask investors to disclose their income or net worth as a means of determining compliance.

‘‘It does make it easier for portals to operate with a large number of investors, which is within the spirit of the law,’’ said Rory Eakin, chief operating officer of CircleUp Network Inc.

The proposal would create a regulatory regime for platforms such as CircleUp that decide to engage in equity crowdfunding. The SEC estimates 50 portals will participate in the market initially. Portals won’t be allowed to recommend deals or give investment advice.

Crowdfunding would not be open to public companies, non-US companies, or those that have no specific business plan.

A company using equity crowdfunding would be limited to raising a maximum of $1 million per year. Companies raising less than $100,000 would have to disclose financial statements and their income-tax returns for the most recent fiscal year. A company seeking to raise more than $500,000 would have to provide audited financial statements. That requirement may deter some companies from participating in equity crowdfunding, Eakin said.

Companies raising more than $100,000 but less than $500,000 would need to provide financial statements reviewed by an independent public accountant.

‘‘It’s a very expensive process for early stage companies to spend $20,000 or $30,000 to have an audit,’’ Eakin said. ‘‘Venture firms historically don’t require those in Silicon Valley.